Question

Velma and Keota (V&K) is considering an investment opportunitiy. The investment requires V&K to spend $10,444.78 to acquire a piece of asset. The asset will have an expected useful life of three years and no salvage value. This investment will generate expected cash inflows of $4,200 per year for the next three years. V&K has established a 9 percent minimum rate of return for all investments. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Required

1. Calculate the total present value of all cash inflows for this investment opportunity. (Round final answer to the second decimal point. Do not round intermediate calculations.)

2. Calculate the net present value of this investment opportunity. (Round final answer to the second decimal point. Do not round intermediate calculations.)

3. Calculate the internal rate of return for this investment opportunity. (Do not round intermediate calculations.

4. a.	Present value of cash inflows
   b.	Net present value of investment
   c.	Internal rate of returen		%

Answer 1

Initial Outlay = 10444.78

Annual Cash Inflow = 4200

Time = 3 years

Rate = 9%

PVIFA(9 %,3 years) = 2.5313

a.

PV of all cash flows = Annual Cash Flow * PVIFA (9%,3 years)

= 4200 * 2.5313

= 10631.46

b.

Net Present Value = PV of all cash flows - Initial Outlay

= 10631.46 - 10444.78

= 186.68

c.

Internal rate of return is discount rate at which NPV is 0 i.e PV of all cash flows is equal to its initial outlay

PV of all cash flows = Annual Cash Flow * PVIFA (r%,3 years)

10444.78 = 4200 * PVIFA (r%,3 years)

PVIFA (r%,3 years) = 10444.78 / 4200 = 2.48685

Looking at the PVIFA tables, for three years the rate at which PV factor equals 2.48685 is 10%

Hence IRR = 10%

d.

a.	Present value of cash inflows	10631.46
b.	Net present value of investment	186.68
c.	Internal rate of return	10%